Williams-Sonoma Inc (WSM) 2015 Q4 法說會逐字稿

Welcome to the Williams-Sonoma Incorporated fourth-quarter and FY15 earnings conference call.

(Operator Instructions)

This call is being recorded.

I would now like to turn the call over to Gabrielle Rabinovitch, Vice President Investor Relations, to discuss non-GAAP financial measures and forward-looking statements.

Please go ahead.

Thank you, Melissa.

Good afternoon.

This call should be considered in conjunction with the press releases that we issued earlier today.

Our discussion will relate to results and guidance excluding non-GAAP items.

A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful are discussed in our press releases.

This call also contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which address the financial condition, results of operations, business initiatives, trends, guidance, growth plans and prospects of the Company in 2016 and beyond, and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.

Please refer to the Company's current press releases and SEC filings, including the most recent 10-K and 10-Q for more information on these risks and uncertainties.

The Company undertakes no obligation to update or revise any forward looking statements to reflect events or circumstances that may arise after the date of this call.

I will now turn the conference call over to Laura Alber, our President and Chief Executive Officer, to discuss our results.

Thank you.

Good afternoon.

Thank you all for joining us today.

On the call with me, are Julie Whalen, our Chief Financial Officer, and Pat Connolly, our Chief Strategy and Business Development Officer.

Today, we are reporting record revenue and earnings per share for the year as a result of the strength of our portfolio of outstanding brand, our balanced multi-channel model and solid execution.

We delivered top and bottom line performance within our guidance range despite a challenging end to the year.

Disciplined management allowed us to meet our commitments as we adjusted to an evolving consumer and competitive landscape.

Our brands are highly aspirational and relatable at the same time and create a platform for growth.

As we look forward, in all of our brands we have targeted strategies and opportunities that we believe will allow us to profitably grow market share.

We'll improve our competitive positioning across product, service and value for our customers.

We are expanding our brands into new products and market segments through the expansion of proprietary products.

We are developing cross brand initiatives to more fully engage with our customers and to leverage innovative marketing channels.

And we are also investing in our high-growth newer brand, particularly West Elm.

The brands current growth trajectory, entry into the commercial furniture market with West Elm Workspace, and International growth potential, position it to become a $2 billion brand.

We are rapidly expanding our global reach through existing and new franchise relationships and other opportunities such as the John Lewis Shop-In-Shop model.

In addition to executing against our growth initiatives, we see the opportunity to do business differently.

We have identified four key strategies that will drive improvements across the organization.

We are confident that, between our growth opportunities and these strategies, we will double our revenues over the next 10 years.

First, we will reassert our product leadership.

Going back to the first phase of Chuck Williams' store in Sonoma, we have been a leader and innovator in building differentiated and market-leading product assortments.

Our goal is to ensure our product serve a distinct purpose by being differentiated from our competitors through our price quality relationship, design aesthetic and functionality.

We have developed a best-in-class vertically integrated sourcing network.

To remind you, our direct sourcing advantage separates us from conventional retailers and online marketplaces in our category.

We employee more than 1,000 associates located in offices around the world who directly oversee the contract manufacturing of our products.

This allows us to ensure our consistent high level of quality from construction to engineered packaging.

We can also monitor every aspect of social compliance from fair wages and working conditions in factories to the use of toxin free raw materials.

And we eliminate layers of cost from agent commissions to vendor and distributor markups.

This allows us to deliver outstanding quality to great value while advancing social consciousness in the communities in which we operate.

From artisan education to sustainability, free trade to handcrafted, we believe that doing business the right way creates the greatest long-term enterprise value.

In addition, we are now focusing our efforts on developing and buying fewer, more differentiated products that better leverage this network across all of our brands.

We believe that our long-term sustainable success on both the top and bottom lines will be built on a foundation of product quality, innovation and value.

Second, we are revolutionizing our approach to inventory.

We have a significant opportunity to improve customer service and reduce costs by advancing our inventory management practices.

In 2015, we experienced supply chain challenges related to the West Coast port disruption that resulted in increased costs and lower service levels.

As we worked through a resolution, it became clear to us that we have an opportunity to reduce costs through more aggressive inventory management.

Our goal is to lead the market in the delivery of furniture and home furnishings.

In 2016, we are planning inventory growth lower than our sales growth for the year.

There are two key components to this plan.

First, we have begun implementation of a new inventory optimization system that advances our SKU level demand forecasting and gives our teams more sophisticated tools to replenish our regionalized distribution network in stores.

And second, we're eliminating less productive SKUs, which allows us to have better in stocks and improved order fulfillment.

We see this as a significant opportunity and our entire team is aligned around this initiative.

In addition to inventory optimization, we are further regionalizing our supply chain.

We know that being closer to our customers is the key to faster and lower cost delivery.

As part of these plans, we're opening a new distribution center in Brasselton, Georgia, approximately 50 miles northeast of Atlanta.

Delivery times to Southeast customers will improve and we expect to see a reduction in abound freight costs as this DC will be used for both home deliveries and retail fulfillment.

We will have four distribution centers strategically located on the West Coast, in the Midwest, the Southeast and on the East Coast.

The key to lowest cost damage free delivery of large furniture items is reduced the number of touches or movements of the furniture.

Our network is designed to minimize the number of times the furniture is moved and will provide a significant competitive advantage.

Importantly, as the result of our inventory initiatives, we do not anticipate adding incremental distribution centers for the next three years.

Collectively, these efforts will remove cost from our supply chain and materially improve our service levels.

Third, we are transforming our marketing.

We are strengthening our marketing around the value propositions of each of our brands and what makes our products and services unique in the marketplace.

We know that our products are differentiated from our competitors in safety, material, construction, design and social consciousness, and that we offer best-in-class services.

We're going to more aggressive about marketing our key differentiators and why customers should buy from us.

We will better leverage our content to emphasize these messages across all of our marketing channels.

Finally, we are continuously advancing our marketing strategy which is identifying ways to efficiently drive revenue increases through our portfolio brands.

And fourth, we are changing our approach to real estate and the retail experience.

Our stores are one of the most powerful marketing tools we have and one of our biggest competitive advantages.

We have built the trust customers have in our brands by giving them the ability to physically experience our products across more than 600 locations.

This is incredibly powerful.

However, as retail traffic has declined and customer shopping patterns have shifted, we know that our stores need to be in relevant locations and provide our customers with a great shopping experience.

To continue to lead in retail, we are changing our approach.

We are making technology investments to improve our cross channel experience.

Our new strategic sales platform will lead to a more inspiring and effortless customer experience.

We are customizing assortments by store size and volume and simplifying non-selling tasks so our stores can focus on the customer.

We are actively looking at store locations that are undesirable due to mall deterioration, excessive rent escalations or other market conditions, and repositioning in exciting new locations.

And we are defining the store of the future for each of our brands.

Across our brand portfolio, we have developed and tested innovative store concepts from architecture to design to experience.

This year, you will see us selectively introduce these transformative changes across our retail fleet.

Our retail store future includes an exciting and convenient in-store experience, a more strategic view of real estate and a sustainable and profitable model.

Together, we believe that these strategies will extend our leadership position across our brands and in our supply chain providing us with a greater competitive advantage.

However, these strategies that I've just outlined require additional resources and focus.

We have carefully assessed our business needs, and as a result, we are reducing costs in areas of our organization to fund these priorities.

We've had to make difficult decisions, including the reduction of headcount in our corporate functions by approximately 5%.

These decisions are very tough knowing that they will affect a number of our valued employees, but we believe they are necessary to achieve our long-term objectives and deliver on our commitments for all of our stakeholders.

I would now like to update you on the performance of our brands, beginning with the Pottery Barn brand.

Pottery Barn comparable brand revenues decreased 2% in the fourth quarter, falling short of our expectations.

For the full year 2015, Pottery Barn grew comparable revenues 1.9%.

During the fourth quarter, from a product perspective, we saw growth in our core furniture and textile businesses.

Strong product categories were upholstered furniture, seasonal lighting and seasonal textiles.

However, we experienced softer sales trends in our gifting categories where there was greater promotional fatigue across our competitive set.

As we move into the new year and away from the gifting holiday, we are seeing improved trends.

We attribute this trend reversal to the launch of our spring and summer collections, improved marketing messaging and better in stock versus last year.

As we look to 2016 and beyond, we are committed to accelerating our growth.

First, we will continue to introduce relevant and authoritative product assortments with a focus on innovation, function and value.

To achieve this, we will strategically expand our mix of opening price points across key areas of the business and highlight these price points to attract a broader customer base.

We've also place renewed attention and emphasis on product categories that sell particularly well in our e-commerce channel.

And we are increasing our percentage of environmentally responsible products.

Our commitment to these healthy home assortments is consistent with our core value of corporate responsibility and differentiates us from our competitive set.

Second, to support these product strategies, we are more clearly communicating our category dominance and our points of differentiation, including our aesthetic, our quality and value, our initiatives related to responsible source materials and our exceptional services.

In e-commerce, we are intensifying our efforts to drive traffic and conversion.

Third, operational excellence.

You may remember that, at this time one year ago, Pottery Barn's inventory of flow was affected by the port disruption and in stock levels were low.

Entering 2016, we're significantly better positioned with higher in stocks.

We believe that starting the year from this position of strength will allow us to grow our top line, accelerate new customer growth and deliver high level of customer satisfaction.

In Pottery Barn Kids, fourth-quarter comparable brand revenues were flat to last year.

For the full year, Pottery Barn Kids comparable brand revenues grew 2.2%.

Playroom and bedroom furniture introductions contributed to growth in furniture.

We're also pleased with the strong response to our new Star Wars program and our other high-quality differentiated gifts.

And we saw strength in our bedding categories, specifically in quilts.

We had tougher business in some of our textiles and decorative accessories categories.

Pottery Barn Kids stands for timeless design and superior quality at a compelling value.

Looking ahead in 2016, we are evolving our brand to connect with a broader customer base and we will be expanding our product collections to address the ages and stages of childhood, such as our recent launch of our toddler bedroom assortment.

And we are committed to products that are good for kids and good for the planet and are expanding our offering of organic cotton bedding and Green Guard certified furniture.

Pottery Barn Kids collaboration strategy is also gaining momentum.

Late in January, we introduced our Emily & Merritt nursery collection and early reads of this program have been quite strong.

Tomorrow, we're thrilled to be launching our most extensive collaboration to date with Monique Lhuillier.

Monique has beautifully translated her fashionable runway designs and luxe details into a collection of home furnishings and gifts for our youngest customers.

Now, I will discuss our PBTeen business.

In the fourth quarter, PBTeen comparable brand revenues declined 12.2% with disappointing performance across key categories.

On the year, comparable brand revenues in 2015 declined 2.7%.

Similar to Pottery Barn, we saw declines in our gifting collections.

We believe we relied too heavily on best sellers from previous seasons.

From a product standpoint, to address these challenges, we have been developing differentiated and innovative products to refresh our core assortments.

We are also expanding our offering across the distinct teen life stages to address differing needs of the tween, teen and college customer.

And we are continuing to introduce new collaborations and partnerships to drive engagement, aesthetic diversification and new customer acquisition.

In marketing, we are evolving our approach to emphasize and reflect our brand values of social consciousness, acceptance and empowerment.

As you may remember, on our August earnings call, we discussed initial softening that we are seeing in PBTeen's business.

Over the past six months, we have made significant changes to the brand's leadership, product strategy and marketing.

And, while we have more to do, we are already seeing better results.

This week we announced an organizational change placing the Pottery Barn Teen brand onto the leadership of Jennifer Keller, who is also running Pottery Barn Kids.

Jennifer previously ran the teen brand during the years of its highest and most probable growth.

Consolidating both brands under a single leader will further align our life stages strategy as our Pottery Barn Kids customers transition into their tween and teen years.

Now, I would like to discuss the Williams-Sonoma brand.

In the fourth quarter, the Williams-Sonoma brand had a 0.9% comparable brand revenue growth.

We saw strength in cutlery, food and tabletop departments.

At retail, our store level execution improved over last year.

We hired and trained our seasonal associates earlier and delivered an aspirational, engaging and easy shopping experience.

In e-commerce, we had growth in new customers and improved conversion.

In the fourth quarter, we are also pleased with continued growth in Williams-Sonoma Home, which is driving incremental sales online and at retail.

In the Williams-Sonoma brand, we see additional opportunity to capture mind share and market share and we'll execute strategies to engage every demographic from millennial to baby boomer with exciting products supported by elevated marketing and branding and improvements in our retail strategy.

Great product is the foundation of our strategy in Williams-Sonoma.

For 60 years, cooking enthusiasts have relied on us for innovation and inspiration.

In 2016, we plan to grow our Williams-Sonoma branded products, which allows us to deliver superior quality at higher margins than the industry standard and gives us more control over the promotional environment.

We will expand our Open Kitchen line to appeal to a broader demographic, while satisfying basic needs of our core customer.

And we will increase the number of new and exclusive products from our branded vendor partners.

In addition, we will expand Williams-Sonoma Home.

We will selectively add Home product to stores, broaden the breadth of our assortments, invest in marketing, grow our trade business and look at other ways to extend our reach.

At retail, we see real opportunity to improve our store operating contribution, including floor sets, visual display and allocation strategies that are better matched to store size and volume, refining store assortment and inventory to reduce SKUs and clearance and providing tools to aid in store scheduling and drive key metrics and conversion in sales per hour.

As mentioned in my overview, we are also looking at store locations that are undesirable due to mall deterioration, excessive rent escalations or other market conditions.

At the same time, we are encouraged by the new store models we are developing and, as a part of our retail repositioning, we have identified attractive new real estate near popular dining and entertainment centers.

In e-commerce, we see opportunities to accelerate new customer acquisition, strengthen our content and messaging, and improve on site conversion.

Now, I'd like to discuss West Elm.

Comparable brand growth in West Elm was 12.8% in the fourth quarter.

From a product perspective, West Elm's strong fourth-quarter results were driven by growth across all categories.

Customer response to seasonal assortments delivered significant sales and market share gain.

Throughout the quarter, West Elm balanced new product introductions with an effective promotional cadence and highly targeted and relevant marketing.

West Elm delivered another outstanding year and is strategically positioned to continue its growth well into the future.

Working from core strategies of choice, community and consciousness, we strive to exceed our customer's expectations from sourcing locally made products in their own communities to delivering innovative product with great craftsmanship and value.

And we're just getting started.

As our customers grow and change, so do we, maintaining our brand momentum, do more targeted products and content, as well as new business opportunities that bolster our brand equity.

West Elm's new store strategy is driving incremental profitable growth.

In 2015, we opened 18 new stores, ending the year with 87 total company-owned stores.

And in 2016, we plan to open 13 new stores.

We will expand our international reach and believe both our franchise and wholesale businesses will continue to be successful models to grow our footprint.

We saw a tremendous increase in brand awareness for West Elm in the UK market, following the launch of our first Shop-In-Shop in John Lewis in London.

And we are working there with the team to finalize the details of additional rollouts in 2016.

In addition, West Elm Workspace is a compelling growth opportunity.

Last spring, the concept was introduced into the $25 billion plus commercial furniture market, NeoCon, the industry's premier Trade Show, earning multiple awards.

West Elm has formed relationships with 18 leading dealers across the country in the contract and hospitality spaces.

We will share additional key commercial alliances in the coming quarters as our team builds this important new business.

In summary, we believe West Elm continues to be well-positioned to deliver $2 billion in annual revenues over the long term.

Now, I'd like to discuss our global expansion plans in our emerging brands.

The significant growth and improving profitability of our global businesses give us further confidence in the meaningful opportunity that international expansion represents.

Our focus is on growth, operational excellence and infrastructure.

Currently, our reach outside of North America spans nine countries and includes 69 stores.

Over the next 10 years, we expect that we will have a presence in more than 35 countries.

We have strong partners in the Middle East, Mexico, the UK and the Philippines, and we are actively engaging with new partners.

In 2016, we expect our franchise partner in Mexico to open approximately 15 new stores.

We're also very excited about our newest franchise partner, Rand Brands, a leader in South America, and expect the first stores to open there in mid-2017.

We are growing our Company on business in Australia and the United Kingdom, and we are looking forward to updating you on our progress throughout the year.

We're also seeing strong results from our emerging brands Rejuvenation and Mark and Graham.

These brands grew close to 40% in 2015, and importantly, in each of these brands, we are growing profitably with a disciplined investment approach.

Rejuvenation had a strong 2015, and we believe brand growth will accelerate driven by the success and expansion of the Northwest Modern Lifestyle assortment, further category expansion, our broadening demographic base of customers and further development of the Atlanta and Chicago markets.

Also in 2015, Mark and Graham completed its third full year as a brand.

We're seeing order and traffic growth, which is driving revenue growth.

Mark and Graham's classic preppy collections features added assortment of high-quality personalized gifts.

And in 2016, we will continue to introduce new categories and build brand awareness through efficient catalog prospecting and digital marketing.

The ability to organically create and build brand to drive sustainable growth is a core competency of our Company.

Now, I would like to pass the call over to Julie to discuss our financial results in more detail.

Thank you, Laura.

Good afternoon, everyone.

Before I walk you through the fourth-quarter financial results in more detail, I would like to begin with a few FY15 financial and operational highlights.

Despite a challenging environment, 2015 was a year of solid accomplishments with record revenue and earnings.

For the full year, we delivered net revenue growth of 5.9%, taking our total revenues to nearly $5 billion, and we delivered EPS growth of 5.3% to $3.37, consistent with our guidance.

Our revenue growth on the year, once again, exceeded the home furnishings market and allowed us to capture additional market share.

Our e-commerce revenues grew to be 51% of the total and retail revenue growth accelerated 300 basis points, growing 5.4% to almost $2.5 billion.

West Elm delivered another year of outstanding growth with revenue increasing more than $152 million, or 22.7%, and comparable brand revenue growth increasing 14.8%, a double-digit increase for the sixth consecutive year.

We also experienced close to 40% growth for the year in both our emerging brands, Rejuvenation and Mark and Graham.

And in our International operations, we saw more than 25% growth.

Our pure merchandise margins were flat on the year, demonstrating the direct sourcing advantage we have over other retailers.

Our SG&A leveraged 60 basis points, highlighting our strong financial discipline.

And, we generated $544 million in operating cash flow, returned $353 million to stockholders and invested in our long-term initiatives with $203 million in capital expenditures.

Now, I would like to discuss our fourth-quarter financial results.

In the fourth quarter, net revenues grew to $1.586 billion, a year-over-year increase of 2.9%, with comparable brand revenues increasing 0.8%.

Growth was balanced between channels, with net revenues in both our e-commerce and retail channels growing 2.9% and representing 50% of total revenues.

Strong growth in West Elm's new stores and in our franchise operations, drove total Company revenue growth ahead of comparable brand revenue growth.

Gross margin for the fourth quarter, was 38.3% versus 40.1% last year, including occupancy costs of $165 million in the fourth quarter of 2015, versus $155 million in the fourth quarter of 2014.

Merchandise margins were only slightly down to last year, with gross margin deleverage primarily related to shipping and fulfillment related costs, occupancy deleverage from our supply chain operations and a lower margins associated with higher franchise sales, which are dilutive to gross margin but accretive to the operating margin.

In the fourth quarter, while continuing to absorb higher shipping and fulfillment related costs, as we work to improve service levels and efficiencies in our supply chain, we also faced a more challenging retail and macro environment, resulting in a more tentative consumer and aggressive discounting.

Unlike other retailers, however, we were able to substantially hold our merchandise margins as a result of our direct sourcing advantage that has allowed us to bring higher quality product to market at a lower cost and to pass that along to the consumer.

And while we incurred higher supply chain costs, we are confident that the steps we have taken were the right ones.

We are better balanced from an inventory standpoint and have seen improvement in our order fulfillment rates and shipping costs.

SG&A decreased to 24.3% of revenues, from 25.2% in the fourth quarter of 2014.

This 90 basis point improvement resulted from overall expense discipline reflecting lower employment costs despite absorbing higher labor costs associated with our fulfillment operations, reduced general expenses and advertising leverage.

Operating margin for the fourth quarter was 14%, versus 14.9% in the fourth quarter of 2014.

By channel, the operating margin in the e-commerce channel in the fourth quarter was 22%, versus 23.6% last year.

The 160 basis point decline was primarily related to lower gross margins resulting from the increased shipping and fulfillment related costs and higher supply chain occupancy costs, as well as the increased employment costs in our distribution centers.

In the retail channel, the operating margin was 15.3%, versus 17% in 2014.

Deleverage in the retail channel resulted primarily from the higher shipping and fulfillment related costs.

Corporate unallocated operating expenses represented 4.6% of net revenues, versus 5.4% of net revenues in 2014.

The 80 basis points of leverage resulted from expense discipline including lower employment costs, as well as lower general and administrative costs.

The effective income tax rate in the fourth quarter was 36.6% versus 38.2% last year, reflecting fluctuations in the level and mix of earnings, as well as the favorable resolution of certain income tax matters.

These overall results generated $223 million in operating income and $1.55 in diluted earnings per share in the fourth quarter.

So we were disappointed in our fourth quarter top line performance.

Our strong financial discipline across the Company allowed us to meet are financial guidance.

On the balance sheet, we ended the quarter with a cash balance of $194 million and no debt, and merchandise inventories increased 10.2% to $978 million.

However, excluding inventory associated with the areas that are currently demonstrating double-digit revenue growth, West Elm, our emerging businesses and our international operations, year-over-year inventory growth was 4.3%.

Now, I would like to discuss our 2016 guidance.

For the first quarter of 2016, we expect to grow net revenues 4% to 6% to a range of $1.07 billion to $1.09 billion, with comparable brand revenue growth of 3% to 6%.

We expect operating margin to be relatively in line with last year's operating margin rate.

We expect diluted earnings per share to be in the range of $0.48 to $0.52.

For the year, we expect to grow net revenues 4% to 6% to a range of $5.15 billion to $5.25 billion, with comparable brand revenue growth in the range of 3% to 6%.

We expect operating margin to be 9.8% to 10%.

Diluted earnings per share are expected to be in the range of $3.50 to $3.65.

In FY16, we are also planning capital spending in a range of $200 million to $220 million.

This guidance reflects the investments we are making across our business to strengthen our competitive advantages and position us for long-term market share gains.

The investments we'll be making are in those areas where we see sustainable long-term returns for our shareholders.

First, we are investing in our supply chain.

As Laura mentioned, we are opening a new distribution center in the Southeast to allow us to further regionalize our network to drive superior customer service and supply chain efficiencies by improving customer delivery times, labor productivity and reducing freight costs.

While we expect to see a reduction in outbound freight costs overtime, as well as a reduction in off site facility costs, we will see cost ahead of savings in the initial months of operation until we are up and running.

We are implementing a new inventory system that will support our regionalization and efficiency efforts, allowing us to better optimize our inventory levels and to enhance the visibility to our inventory throughout our supply chain network.

We're also investing in supply chain labor in the form of higher hourly wages to attract and retain the best talent in our distribution centers in an increasingly competitive environment for such labor.

Our supply chain is foundational to our competitive advantage and we see a clear path to extend our leadership position in the fulfillment of furniture and home furnishings.

We are building a more responsive, flexible and efficient network that will scale with our growth and allow us to drive a long-term competitive advantage and sustainable efficiencies.

Second, we are investing in e-commerce to support its continued profitable growth and to maintain our leadership position.

We are focused on continuous improvement in customer experience from site functionality to the tools we give our customer service representatives.

We also plan to increase our marketing investment, focusing on new customer acquisition via strong content marketing and personalization.

Third, will be making investments in our retail fleet, one of our most powerful marketing tools and competitive advantages.

We will be adding 27 new stores, predominantly in the West Elm brand, our fastest-growing brand, as well as remodeling and relocating certain stores across our fleet to ensure a great shopping experience.

We will also be investing in new point-of-sale technology across all of our stores.

Additionally, as Laura mentioned, we are reorganizing our corporate headquarters along with some other areas of the Company, reducing employment costs that can be reinvested into our long-term strategic initiatives, our supply chain operations and e-commerce.

This reorganization is estimated to result in a one-time charge during the first quarter of approximately $10 million to $12 million.

This will be treated as a non-GAAP charge and, therefore, is not included within our Q1 and fiscal year EPS guidance ranges.

I would now like to turn to our three-year outlook.

Our outlook remains unchanged with mid to high single-digit revenue growth and low double-digit to mid-teens EPS growth.

While we anticipate our 2016 earnings growth to be lower than this outlook due to the investments that I've outlined, we are confident that our business will deliver these results over the next three years by leveraging our strong foundation and core competencies.

We expect to drive profitable growth with West Elm's path to $2 billion in revenues, the scaling of our global expansion initiatives and emerging businesses, Rejuvenation and Mark and Graham, as well as continued market share gains across our brand portfolio.

Additionally, we expect to realize further supply chain efficiencies, including reduced freight and off-site distribution center costs, as well as improved labor productivity as a result of our investments.

Further, we do not anticipate opening any additional distribution centers over the next three years, allowing us to better leverage our supply chain costs in 2017, and beyond.

With all of these opportunities for growth and efficiencies, we are confident we can deliver this longer-term outlook.

We also remain committed to a balanced capital allocation strategy, utilizing our operating cash flow to invest in the business, to support our ongoing growth initiatives and to return cash to shareholders.

We expect our capital expenditures to remain within the range of $200 million to $220 million.

We expect to continue to target our dividend levels at approximately 35% to 40% of net income and in line with the S&P 500 dividend yield.

Today, we announced a 6% increase in our quarterly dividend to $0.37.

This is the 10th dividend increase we have had since we first started paying dividends in 2006.

We also expect to repurchase shares annually at a level to at least offset equity dilution.

Today, we also announced a new $500 million share repurchase program that we intend to execute over the next three years.

Over the past five years, between both dividend payments and share repurchases, we have returned more than $1.5 billion to our shareholders.

In summary, we know our competitive advantages, combined with our strategic growth initiatives, will allow us to maintain our leadership position.

Our well-known brands with compelling product at a great value, our multi-channel business, our superior customer service, our opportunities for growth, our strong balance sheet and our experienced leadership team give us the confidence in our longer-term ability to deliver sustainable, profitable growth.

I would now like to open up the call to questions.

(Operator Instructions)

Daniel Hofkin, William Blair & Company.

Good afternoon.

I just wanted to follow up a little bit on the near-term guidance and then square that a little bit, just a bridge a little bit to the longer-term view, which sounds like it is in line with what it has been.

For 2016, I know you will have the absence of certain, let's say, drags related to the port.

Can you help us think about how much of a drag that was last year and then how much the incremental investments are in total this year?

Then again, maybe help us if there's one or two most important things, whether it is supply chain rolling off over the next few years or something, some other aspects of it, that bridge to that higher rate of longer-term growth, that would be helpful?

Thanks very much.

Sure.

I think as we said in our prepared remarks, we anticipate our 2016 earnings growth to be lower than our three-year outlook because of the investments that I just highlighted, particularly in our supply chain.

And short-term, though those offset the port benefit quote-unquote that may have been expected this year, longer-term those are strategic initiatives for us.

As far as it bridging to the three-year outlook, we believe that after we anniversary the investment in this additional Southeast DC, particularly this year, and as we move through the year, as we've seen on a lot of our shipping performance metrics improve and we get out of off-site DCs, et cetera, all of that will allow us to leverage our supply chain operations.

And that, plus the additional opportunities for growth that I highlighted, obviously across West Elm with their $2 billion in rev, growing to $2 billion in revenues, the scaling of our global initiatives, our emerging brands, who have had 40% growth just this past year alone, all of that happening at the same time and not investing in additional DCs over the next three years, should allow us to take a step up in 2017 and 2018 to where our longer-term three-year outlook implies on the earnings line.

Thank you.

Peter Benedict, Robert Baird

Hello, guys.

Thanks.

A couple times, Laura, you mentioned appealing to a broader base, customer base, and I was just curious, are you speaking about age demographics, millennials, et cetera, or are you talking more income demographics?

One of the greatest advantages of our multi-brand Company is that we have differing aesthetics that appeal to different types of customers at different life stages.

I think that it is a really good place to be.

You'd like to see them all go up at the same time, but the reality is it gives us, and I'm sure in your portfolios, a hedge if there's one certain area that is trending or not trending.

So what we are always looking for is the white space both areas where none of the brands are covering or within a brand where we may not be performing to our -- to the level we think we should be.

So specifically, I think there's no brand that better understands the millennial customer than West Elm, and we've learned a lot through studying what they are buying and how they are buying it and when they are buying it and what's appealing to them.

So that allows us to think really specifically about how to appeal to that customer in the other brands.

So, we see a lot of opportunity without losing our core customer to appeal to a wider range of customers and to be very accessible to people.

And as I said earlier, accessibility is key and it is also important that you are providing inspiration.

But you don't want to be so inspirational that people don't relate to you.

So, that is a really key attribute of the way we are approaching our brand aesthetics and thinking about the future and thinking about stores that are extremely welcoming and energetic, new and fresh in great markets and then how that translates to the website.

Matthew Fassler, Goldman Sachs

Thanks a lot.

Good afternoon.

Could you both size this investment in the Southeast DC in particular?

It seems like it is a pretty big item for this year.

And then, just to the extent that 2015 and 2016 are going to be below the algorithm, as the world is changing, what will get easier to enable you to get back on that track?

It feels like the competitive environment probably has been out of somewhat dynamic.

Do you expect that to abate or have you incorporated those ongoing challenges in your thought process?

Matt, I will start.

Basically, we have not per se, quantified it except to say that clearly, you can see that it is more than offsetting the related port benefit I think everyone expected us to get back.

We are investing in some very long-term strategic areas for us to continue to drive our leadership position.

We're investing in supply chain, which is the new Southeast regional DC, which is going to allow us to get out of off site, which allows us to reduce occupancy.

It allows us to reduce labor and allows us to reduce labor on productivity.

We are also investing in new systems to be able to get our inventory balanced correctly, which obviously drives efficiencies.

And we are also investing in higher labor costs, which I think we can't underestimate and we are not alone here.

I don't know if other retailers have talked about it, but there's everybody is facing this.

As the world is moving more to eCommerce, the getting distribution center talent, good talent, is getting more and more competitive.

So that is a reality that all retailers are facing right now and so we are investing in that as well.

With that said, as we move throughout this year, I think some of the key things to know is that as we entered the end of the fourth quarter and as we entered into 2016, we saw out of markets improve, we saw better fulfill rates, we saw better back order positioning and we saw reduced shipping costs.

So, all the things we've been working on in the back half of the year, are starting to pan out.

Unfortunately, we have this offset with the -- short-term offset with the incremental costs of this DC.

But as we move throughout the year, that also will start to leverage.

So when we enter the back half/ -- definitely when we get into 2017, we will have supply chain efficiencies that will begin to leverage in a big way plus when you add in these other areas that we've been investing in.

West Elm again, great trajectory.

We cannot underestimate how strong that brand is and what that does to our bottom line.

You cannot underestimate the fact that our international is growing 25%.

It's growing to $300 million this year, and we've talked about how when that starts to leverage, that's a big influence on our op margin.

We've talked about our smaller businesses, Rejuvenation and Mark and Graham, same thing.

They grew 40%, and when those start to grow, that leverages is the bottom line.

So, you put all of that together, by 2017 and 2018, we think we are back to the races with our three-year outlook.

The second part of your question about what's going on in the world, and clearly there's a lot of external factors and many people have pointed to them.

Frankly, we would prefer to be self-critical.

We would rather look at every area of our Company that we can improve so that we can outperform no matter what the environment is.

Hence, the four areas of focus that I reviewed in my prepared remarks.

Also, we believe the promotional environment will not recede and that no matter how you package a discount, a discount is a discount.

So we continue to go through a systematic category review so that we can be sure that we are well-positioned versus the competition and offer price on like items and then we have superior quality.

In summary, we have the changes we're making and we have several structural advantages that we will continue to flex.

Including our exclusive design capabilities, our direct sourcing advantage, our sophisticated marketing capability, and we believe we will see margin upside over time as we reduce less productive SKUs and fully rollout our new sophisticated inventory management system.

Thanks so much.

Chris Horvers, JPMorgan.

Thanks, good evening.

So you are guiding to a much better trend in the first quarter than what you just put up in the fourth quarter.

Can you talk about what's changing?

What happened in the fourth quarter?

Was it the screaming promotional level on the mall?

Was it the tough traffic on the mall?

Was it the consumer reacting to the stock market?

Is it your improved in stock?

So, just give us some perspective on what seems to be a big difference between last quarter and the current quarter.

I'm going to start and then I'm going to let Pat finish.

Q4 was tough across retail and our top line came in lighter than we had planned.

We had gotten off to a stronger start and it was -- the toughest part of our quarter was the high gifting time period.

It was December.

And Pottery Barn brands were the most affected.

But frankly, we expected to see stronger performance in all of our brands as well.

There was a lot of pressure on price points, the nature of gift giving and what I'm very pleased to see is that as we get past that gift giving period and people start to purchase for themselves and for their home, we are seeing better results.

Pat, do you want to talk about some of the marketing?

Sure, Chris, specifically on the direct side of the business, we did see a decline over the high single-digit performance we'd had all year.

Although we are only about halfway through Q1, we are seeing a significant positive change compared to Q4.

I think we are confident in our ability to take market share, especially indirect, in all of our channels.

We are focusing on improved product marketing to better communicate our product quality and differentiation.

We are introducing more products and categories that perform particularly well online.

We are accelerating, in particular, in our marketing, our personalized marketing efforts, our personalization, where we've had excellent results so far and we are advancing these programs.

We are reallocating more of our marketing mix with an increased focus on digital and new customer acquisition marketing programs where we've seen good performance across a range of programs.

So I think we can -- the combination of all those activities are driving positive results and I think will continue -- we're going to continue expand on them in the coming quarters.

Thanks very much.

One follow-up to that.

Do you think there was some questions about the high-end consumer?

Obviously, you saw [Resto] and Nordstrom had made some commentary last summer.

So would any of this element maybe a solidification of your core customer, maybe the stock market's back in a better spot?

As I said earlier, we believe if we stay focused on the areas where we know we win, we will continue to be able to grow across multiple customer areas.

Because every customer is looking for value and great quality and there's a lot of work that we can do to improve those areas for us.

So we prefer to be self-critical, as I said earlier, than to look at these external factors.

Thanks very much.

Jessica Mace, Nomura.

Hi, good afternoon.

My question is on the real estate strategy that you talked about.

I was wondering if you could quantify the opportunity on some of the lower traffic malls?

I think you said 27 openings for 2016.

If there's any guidance you can give us on repositions or closings as well, that would be helpful?

The closures that are in our store guidance that we provided you guys today are not associated with any early determinations.

And at this point, it is really too early to comment on specific leases and landlords.

But I think the key is that we want to make clear our approach is changing.

Our customers are driven by the experience.

They want to engage and feel a sense of community.

So it needs to be local and it must be relevant.

We are looking carefully at our portfolio of leases and we have very strong partnerships with our landlords and that's leading to opportunities.

But as far as the change than what has been provided to you in the guidance, is our standard process of shutting those stores down at the end of their natural lease terminations because they don't meet our profitability hurdles or for whatever reason.

Plus the additions, which are 27, which are particularly in West Elm brand, our fastest growing brand.

Understood, thank you.

Simeon Gutman, Morgan Stanley.

Thanks.

I want to go back to the top line for a second.

I know the comp was about 1% and we know the industry grew a little bit faster than that.

I appreciate you being very self-critical, but I'm curious again to try to focus on if it was a high-end customer that slowed?

There was clearly some share shift.

Are you seeing anything change from a consumer behavior perspective?

Were they more item focused?

Are they not buying the full rooms as they once were?

Just trying to diagnose, and I guess it may be moot if it is improving already this quarter, but it was a relative anomaly from a share perspective and I'm just trying to understand it a little better.

I guess another way to maybe answer your question is that we continue to see very strong furniture growth.

Where we saw weakness was in some of the gifting categories.

West Elm is predominantly a furniture brand and we have our top customers are doing really well with us.

We do look at the whole file and it is really important to us that we have retention and that we have new customer growth as well.

We are always focused on both all the way down the customer curve.

But there isn't one standout piece other than we want more customers and we want them to shop more frequently with us and buy more and have great experiences.

Okay, thank you.

Brad Thomas, KeyBanc Capital Market.

Yes, thank you.

Good afternoon.

I wanted to ask about West Elm and the bigger topic of revenues.

You clearly did very well in growing the West Elm business.

To some extent you just answered this with reference to still seeing strong furniture growth in Pottery Barn.

But, could you give us your latest thoughts on what you are seeing in terms of overlap of customers between West Elm and some of your other brands, namely Pottery Barn, and how you are thinking about that dynamic evolving as you continue to grow the West Elm business?

That's a great question.

We love to study those things and we are very always concerned about any cannibalization.

In fact, we have not seen it.

We've seen it when do cross brand work, whether it is catalog mailings or e-mails or digital marketing, we are seeing lift because it is related and we do not see cannibalization.

In terms of the crossover, it is highly competitive.

So I'd rather not give you that information right now.

But it is additive and it is incremental is what I would answer the question.

Great.

If I could squeeze in housekeeping item for Julie.

Can you quantify for us perhaps how the growth of international may affect margins or operating income in 2016 relative to 2015?

It always depends obviously in the mix of the revenues.

Clearly in Q4, in particular, because we had much higher mix of international and in particular, franchise operations relative to the domestic business, given the softness we saw in Pottery Barn, it has a much bigger impact then on the gross margin.

But, as we continue to grow it and to the extent that growth becomes or comes into franchise, you will see a negative impact on gross margin, but a positive impact on the op margin.

It's accretive, actually, to op margin.

And from a top-level perspective, the more volume we have in international regardless where it comes from, it's a positive because it starts to leverage our entire infrastructure.

I think that's a real key takeaway at a great question.

The fact that we've grown it by 25%, we're now at $300 million, and we're continuing to grow and every metric we are looking at looks for continued improvement, that could be a huge driver for us as we move into the out years.

Great, thank you.

Dan Binder, Jefferies.

Hi, thank you.

It's Dan Binder.

On West Elm, just looking at the comps for sales growth still very strong, a little bit below what you had been earlier in the year.

But you are also slowing -- it looks like you're slowing in the store growth rate and closing two stores.

I'm just curious, as you thought about your real estate strategy, what your thoughts were on West Elm specifically, and the number of stores you think you'll ultimately can get to and whether there was some sort of significant change in the thought process?

We are very pleased with our new store performance and learning a lot about how big this brand can be by opening in a lot of different types of markets and putting additional stores in markets.

And we actually are finding that probably the slightly bigger model, 13,000 versus 10,000 is better.

We are constantly making improvements to the design and the services in our stores and we will continue to look for more opportunity.

But we're diligent, so we don't want to just open stores to open stores.

We are thrilled with the lineup we have for this year and the following year and there's a lot of room for growth also in our direct business.

And as I said earlier, in some other channels of business that we have identified because of how innovative this team is and just seeing opportunity to take categories of furniture that are out there in the world and improve them.

So Workspace is a great example of that and a very big business that's not done through store and is not done through DTC either.

It is done through dealers and will be a great brand, Halo, and another way to extend the brand in the coming years.

Great, thank you.

Michael Lasser, UBS.

Good evening.

Thanks a lot for taking my question.

As you've seen improvement in the business into the first quarter, what have you noticed from the response to your promotions by the consumer?

Have they become more effective?

Has the overall promotional level within the industry become less intense?

Has the improvement been due in part to less giftable items comprising the first quarter than the fourth quarter?

Thank you so much.

Thank you.

Lots of things.

We do not see the promotional environment receding.

There's a lot of people with a lot of different types of promotions.

But we know that the customer is looking for the best value.

They look at the offered price.

They are looking at the quality and the experience matters.

Delivering and receiving furniture is a really important part of the decision and the future purchase decision.

So, we've been working on a lot of things for awhile and I think the combination of all of them is causing some improvements.

It is early, you guys, in the quarter, but we did want to tell you we are seeing some improved results and we are going to build on the successes we are seeing.

And where we are not getting the results we want, we are incredibly critical and we have timeframes and action plans and people accountable for the improvements in those areas.

Sounds good.

Thank you so much.

You're welcome.

Brian Nagel, Oppenheimer.

Good evening.

Thanks for taken my question.

If I'm hearing you correctly, it seemed like the sales weakness in the fourth quarter was much more tied to the giftable categories and we've had now an improvement here at least early in the first quarter.

So the question I have is, if we think about, particularly in the Pottery Barn concepts, how much of that product, how much of a shift in product mix is there through the holidays to giftable items?

Are those -- is the product mix then again shifted now as we head into the spring?

I guess what I'm asking, was there a category or shift that occurred that fueled the sales weakness and now the category is largely gone?

It's so hard to know.

You don't know if someone is buying it for themselves or buying it as a gift.

You just know that they are not buying it as a gift when you get out of December, that it is a self purchase and it is a very different dynamic.

I think about ourselves as customers and how we shop.

I think we have to continually provide better services in the holiday season and even more convenient service next year and then more innovative products.

Because the truth is our success makes other people look very closely at what we're doing and we need to make sure that we are constantly moving to the next great exciting key item versus being able to rely on past sellers.

That's an important change that we are making and we already have started working on our holiday assortments for next year and looking at which things we should change and which things we should carry over and ensuring that we have exciting new things to buy.

At the same time, improving the service because it is a sea of a lot of noise at the holiday season.

And we want customers to come to the mall and have a great experience with us.

And we were pleased with the improvements we made this year, but we think we can do even more in the coming years in store.

If I could just slip one follow-up in.

Was there any type of geographic difference in sales as we think about this weakness that occurred?

Pat, you studied that.

Do you want to answer that?

I think there have been a number of questions about that and we have looked at the performance of all of our brands, particularly in areas like Texas, Florida and Canada.

We see no discernible difference in these markets compared to others.

This is across all the brands and quite honestly, it really hasn't been a burning issue for us.

Okay, thank you.

Thank you and that concludes our question-and-answer session for today.

I'll now turn the conference call back over to Ms. Alber, for any additional or closing remarks.

I want to thank all of you for joining us this afternoon.

We really appreciate your time and your continued support and we look forward to speaking with you again in May.

Thank you.

That does conclude our conference call for today.

We thank you for your participation.

You may now disconnect.